Addressing supply chain issues in food and beverage contracts

The food and beverage industry thrives on precision, timing, and quality. However, a common contractual problem that often arises in this sector is supply chain disruptions. These disruptions can result in delays, substandard products, or even total non-performance of contractual obligations. In this short article, B P Collins’ dispute resolution team takes a look at how these issues arise, their potential consequences, and some of the legal tools available to mitigate them.

The problem: supply chain disruptions

Businesses in the food and beverage sector rely heavily on suppliers to deliver raw materials or finished products on time and to the agreed standard. However, supply chain disruptions occur due to factors like:

1. Unforeseen events: bad weather, transport delays, or labour shortages can cause suppliers to miss delivery deadlines.
2. Poor quality goods: substandard or non-compliant products can render supplies unusable, especially where goods are perishable and where regulatory standards apply (e.g. national food safety laws).
3. Breach of exclusivity or termination clauses: suppliers may enter into conflicting agreements or terminate a contract prematurely, leaving businesses unable to meet consumer demand.

For businesses operating in the food and beverage sector, these issues are particularly damaging, as delays or quality defects can spoil products, harm reputation, damage relations, and lead to lost profits. In an age of reactionary internet reviews, consistency is crucial.

What can be done about it?

An effective way to address supply chain risks is through carefully drafted contracts. Below are some key considerations and clauses to consider incorporating:

Force majeure clauses

A force majeure clause is designed to set out what happens where one or more of the parties cannot comply with their obligations because of a major, unforeseen event, such as natural disasters, strikes and pandemics. It usually allows one or both parties to suspend (temporarily pause, or permanently end) the performance of their obligations. A well-drafted force majeure clause can help parties navigate unforeseen disruptions. It should:

• Clearly define what qualifies as a force majeure event (e.g., natural disasters, strikes, pandemics).
• Outline the steps both parties must take, such as providing prompt notice of the disruption.
• Specify whether obligations are suspended temporarily or permanently.

For businesses in the food and beverage sector, force majeure clauses must be precise, as courts or arbitral tribunals will generally construe them narrowly.

Service Level Agreements (SLAs)

Incorporating SLAs can help ensure that suppliers meet delivery deadlines and quality standards. SLAs should specify:

• Delivery timelines and penalties for late performance.
• Quality standards, referencing applicable regulations or testing criteria.
• Remedies for breaches, such as discounts or termination rights.

SLAs create a measurable standard for performance and give businesses recourse when suppliers fall short.

Exclusivity and Non-Compete Clauses

To protect against suppliers entering into conflicting agreements, consider including exclusivity clauses. These clauses can:

• Require the supplier to prioritise your business for specified products or territories.
• Prohibit the supplier from entering into agreements with competitors during the contract term.

Drafted properly, these clauses aim to ensure reliability and protect market share.

Termination and Remedies Clauses

Contracts should detail the grounds for termination and remedies in the event of breach. For example:

• Do the parties want to allow for immediate termination if the supplier delivers non-compliant products., and how will non-compliance be decided?
• It can also be helpful to include compensation provisions for losses incurred due to the breach.

Clear termination rights empower businesses to act swiftly when problems arise, minimising disruption.

Dispute resolution mechanisms

Disputes are inevitable but resolving them efficiently is key. Include clauses specifying:

• The jurisdiction and governing law.
• Alternative dispute resolution methods, such as mediation or arbitration: arbitration can often allow resolution of issues more quickly than national Courts, but care needs to be taken when deciding on the rules and administrative place / seat for the arbitration.
• Quick resolution is particularly critical in the food and beverage sector, where delays can have severe consequences.

Practical Tips for Businesses

1. Due diligence: vet suppliers carefully, check references, audit facilities, and assess financial stability.
2. Regular reviews: monitor supplier performance periodically to ensure ongoing compliance.
3. Insurance: Consider business interruption insurance to cover losses caused by supplier defaults.

Conclusion

Contractual problems in the food and beverage sector can be mitigated with proactive measures. By including robust terms addressing supply chain risks, businesses can safeguard their operations and reduce the impact of disruptions. Prepared with care, a strong contract is not just a safeguard but a strategic tool for success. For tailored advice, consult a solicitor experienced in drafting and negotiating commercial agreements.

For further advice and information, please contact B P Collins’ dispute resolution team on 01753 889995 or email enquries@bpcollins.co.uk.